Duke Wins Some, Loses Some in 403(b) Excessive Fee Case

While several claims were dismissed, several were allowed to move forward.

A federal court judge has decided that several claims in a lawsuit against Duke University regarding excessive fees are plausible.

The judge in the U.S. District Court for the Middle District of North Carolina denied a motion to dismiss the claim that Duke 403(b) plan fiduciaries failed to engage in a prudent and loyal process for selecting a recordkeeper. The plaintiff claims using four recordkeepers instead of one subjected participants to the same services at a higher cost and that the plan fiduciaries failed to solicit competitive bids from vendors on a flat per-participant fee.

The judge also left intact the claim that “rather than consolidating the plan’s more than 400 investment options into a core investment lineup in which prudent investments were selected for a given asset class and investment style, as is the case with most defined contribution plans, defendants retained multiple investment options in each asset class and investment style, thereby depriving the plan of its ability to qualify for lower cost share classes of certain investments, while violating the well-known principle for fiduciaries that such a high number of investment options causes participant confusion.”

Also, among claims the judge allowed to move forward: Defendants imprudently retained historically underperforming plan investments, notably the CREF Stock Account. In the opinion, the judge said, “The defendant has insufficiently explained why the seventh cause of action should be dismissed.”

The plaintiff asserts that “[b]y allowing the plan to be locked into an unreasonable arrangement . . . defendants caused the plan to engage in transactions that it knew or should have known constituted” a prohibited transaction “each time the plan paid fees to TIAA-CREF.” The judge noted that these claims are subject to a six-year limitations period, which is shortened to three years if the plaintiff had actual knowledge of the breach. The plaintiffs do not allege a specific date as to when Duke entered into the agreement with TIAA-CREF which “locked” Duke in to both offering the specified TIAA-CREF products and to using TIAA-CREF’s recordkeeping services, though they do allege facts indicating that Duke had entered into the arrangement with TIAA-CREF by 2010. The defendants say the 2009 Form 5500 it filed, showed that TIAA-CREF was an “investment” carrier” in that year. The plaintiffs do not dispute that date. The judge dismissed this claim as time-barred.

Among other claims dismissed was the allegation that TIAA-CREF, VALIC, Fidelity, and Vanguard are parties-in-interest “as the plan’s providers of investment services.” They further allege that the defendants engaged in prohibited transactions “[b]y placing investment options in the Plan in investment options managed by TIAA-CREF, VALIC, Fidelity, and Vanguard.” But, the judge said, to the extent the plaintiffs are alleging that it was a prohibited transaction to invest in mutual funds because the entities providing the mutual funds are parties-in-interest by virtue of making mutual funds available for investment, the statute precludes that argument.